Impact of COVID-19 Legislation on Nonprofits

April 3, 2020 | Article

The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) includes numerous provisions intended to provide economic relief to organizations impacted by COVID-19, including many if not all nonprofits.

COVID-19’s impact is far reaching. We’ve developed resources to help you make sense of it.

Common Questions on the CARES Act and Nonprofits
Below are frequently asked questions we’ve received in relation to COVID-19 and the CARES Act.

Do the provisions included in the CARES Act apply to nonprofit organizations?
Yes, for the most part. The CARES Act is a broad economic stimulus and tax bill that is intended to provide relief and assistance to individual taxpayers and businesses alike. Many of the provisions that apply to businesses do not limit the aid and assistance to specific entities or industries but rather apply limitations based upon the number of employees.

However, some of the provisions to determine the applicability are based on an organization’s specific tax classification under 501(a) of the tax code. For example, the Paycheck Protection Program defines eligible businesses to include nonprofit organizations, but only those organized under Section 501(c)(3). Veteran Organizations exempt under 501(c)(19) are separately referenced outside the definition of “nonprofit organizations” and are also included as eligible organizations for this program. Guidance has been provided by the SBA in a specific frequently asked questions document to clarify that faith-based organizations are eligible to receive SBA loans under both the PPL and EIDL programs. Some of the other provisions include the term “nonprofit organizations” but that term has not been fully defined. In addition, there are many provisions within the CARES Act that apply specifically to healthcare and educational organizations including specific industry appropriations.

We recently broke down what’s included in the CARES Act.

Our organization is currently facing short term cash flow needs. I have heard there are SBA loans available to help organizations keep their employees. What are these and how do they work?
At this tumultuous time, many nonprofit organizations may be facing reduced contributions and revenues due to economic uncertainty and community mandates requiring residents to shelter-in-place. Many nonprofit organizations that have cash-flow needs to pay employees and continue operations may qualify for relief and assistance through one of the SBA loan programs available via the CARES Act.

The CARES Act made modifications to two key types of loans provided by the SBA, making them available to more organizations.

Unsure how the relief provisions work?

Paycheck Protection Program under 7(a)
The Paycheck Protection Program (PPP) under 7(a) provides federally backed loans to small businesses with fewer than 500 employees (subject to some modifications for affiliations) or that meet SBA alternative size standards. Nonprofit organizations eligible for these loans include 501(c)(3) and (c)(19) organizations as well as religious organizations and certain governmental hospitals. PPP loans are available in amounts up to $10 million or 2.5 times the organization’s average monthly payroll from the prior year.

PPP loans must be used to cover eligible payroll expenses (not in excess of $100,000 per employee), mortgage or debt obligation interest payments, utilities and rent. The CARES Act defers payments of principal, interest and fees for at least six months on the loans and caps interest at 1%. Organizations may apply to receive loan forgiveness for eligible costs spent over eight or twenty-four week covered periods, but the amount forgiven may be reduced if the organization spends less than 60% of the loan proceeds on eligible payroll expenditures, does not maintain FTE employee levels or does not maintain salaries. The application period for these loans runs from April 3, 2020, to June 30, 2020.

Economic Injury Disaster Loans
The CARES Act modified the existing Economic Injury Disaster Loans (EIDL) program by expanding eligibility and waiving certain requirements. These loans are available to all nonprofit organization types regardless of the number of employees and provide working capital for organizations that cannot meet their ordinary and necessary financial obligations as a result of a disaster.

EIDL loans have an interest rate of 2.75% for nonprofits and include an emergency advance payment of up to $10,000 that can be received within three days of the application. This emergency advance payment may be forgiven even if a borrower is denied EIDL funding, thus effectively being treated as a grant. If an organization receives a loan under the PPP program, the advance payment would be considered as part of the forgiveness of that loan. 501(c)(3) or 501(c)(19) organizations that receive a PPP loan may also receive an EIDL loan as long at the loan is not used for the same purpose.

We’ve broken down the components of the SBA loans.

How is the number of employees determined under the Paycheck Protection Program?
The number of employees is determined based upon the average number of people that are employed for each pay period over the last 12 calendar months. Any person that is included on the payroll whether full time, part time or temporary must be included as one employee.

In determining employees, an organization must include the employees of all affiliates in the calculation. Generally, affiliation exists where one business controls or has the power to control both businesses. Control can arise through ownership, management or other relationships. For nonprofit entities without stock, this control may occur if one or more officers or directors controls the board and/or management of another business.

How do I maximize PPP Loan forgiveness?
Loans under the Paycheck Protection Program through the SBA are eligible to be forgiven in whole or in part. In order to obtain forgiveness for the loan, a nonprofit organization must spend the loan proceeds on eligible expenses, maintain FTEs and maintain the salaries of its employees. Eligible expenditures are split into two categories and require at least 60% of the funds to be spent over the covered period on eligible payroll expenditures and 40% or less on eligible non-payroll costs such as rent, mortgage interest and utilities. Nonprofit organizations should keep all records of expenditures, FTEs and payroll to substantiate loan forgiveness with their lender and the SBA. The PPP Loan Forgiveness Application should be completed within 10 months of the end of the covered period (8-weeks or 24-weeks) with all records kept for a period of six years.

Are nonprofit organizations with leased employees eligible under the Paycheck Protection Program?
Yes, nonprofit organizations that obtain employees from temporary employee agencies, professional employee organizations or that otherwise lease employees from outside of their organization are eligible for SBA loans and should include these individuals in their calculation of the number of employees to qualify. Note that volunteers or individuals who receive no compensation for work performed are not considered employees.

My nonprofit has more than 500 employees, are there other loans available for larger organizations?
In addition to the EIDL program, the CARES Act also provides relief to mid-size employers via the Main Street Lending Program, which will provide loans to employers with 500 to 10,000 employees. Guidance initially released on the implementation of these loans indicated that these funds were not available to nonprofit organizations, however, the Federal Reserve is currently working to establish loan options that are separate and suitable for nonprofits under the program.

I’ve heard there are other payroll tax provisions available, can my nonprofit utilize these as well?
Maybe. The CARES Act includes a provision (Payroll Tax Deferral) that provides for the delayed payment of employer payroll taxes, i.e. the 6.2% Social Security tax. Payments due from the date of the CARES Act’s enactment through December 31, 2020, may be paid in 50% installments at December 31, 2021, and December 31, 2022. Initially this provision was not available if the organization received loan forgiveness under the Paycheck Protection Program. However, recent changes to the PPP eliminated that restriction.

The CARES Act also created an Employee Retention Credit, a refundable payroll tax credit that is available to businesses, including nonprofit employers, that have closed or significantly reduced operations due to COVID-19 or had significant reductions in revenue. The refundable credit is equal to 50% of qualified wages. For eligible employers with more than 100 employees, those are wages paid to an employee even though the employee is unable to work due to a full or partial suspension of operations due to a governmental “stay at home” or other order.

For eligible employers with 100 or fewer employees, “qualified wages” include all wages paid whether the employer is open for business or subject to a shutdown order. An organization is eligible for the credit if (a) its operations were fully or partially suspended during the calendar quarter due to government restrictions limiting travel, commerce or group meeting due to COVID-19 or (b) remained open but gross receipts declined by more than 50% compared to the corresponding quarter in 2019. Employers can be immediately reimbursed for the credit by reducing their required deposits of payroll taxes by the amount of the credit. Employers receiving PPP loans are not eligible to receive the Employee Retention Credit.

Organizations should review all loan and credit alternatives to determine which will provide the best option to assist the organization with cash flow needs.

How are gross receipts defined for a nonprofit organization?
Gross receipts for a tax-exempt employer include gross receipts from all operations, not only activities that constitute unrelated business income. Gross receipts will include all amounts received as payment for services, investment income including dividends, interest and royalties; contributions, gifts and grants; and dues or assessments from members or affiliated organizations.

If I receive funding under one of the SBA loans, is this treated like other federal loans or grants such that the receipt will subject my nonprofit to federal Single Audit requirements?
Federal loan programs and federal grants subject to a Single Audit are required to be included on the schedule of expenditures of federal awards. Organizations are subject to Single Audit requirements when their cumulative federal expenditures, including loans, exceed $750,000.

The AICPA Governmental Audit Quality Center announced that PPP funding will not be subject to Uniform Guidance single audit requirements. However, funding under the EIDL program will be subject to single audit requirements.

It is important to remember, that even though PPP funding is not subject to single audit requirements, PPP loans over $2 million are subject to an SBA audit. At this time, further guidance about what this audit looks like has yet to be released.

COVID-19 has also impacted other financial reporting considerations.

Our nonprofit organization self-insures for unemployment insurance, is there relief available?
Yes. The CARES Act includes a provision for nonprofit organizations that reimburse the state dollar-for-dollar when former or furloughed employees file for unemployment benefits (reimbursable employers). The provision provides that reimbursable employers may be reimbursed for 50% of the costs associated with benefits provided to employees that are laid off or furloughed due to the COVID-19 pandemic between March 13 and December 31, 2020.

What other incentives are included in the bill that will impact the nonprofit industry?
The CARES Act includes charitable giving incentives targeted towards individual and corporate donors. The act allows a $300 above-the-line deduction for 2020 charitable contributions to 501(c)(3) organizations for individual taxpayers that do not itemize. These contributions must go directly to the charity; donations to donor advised funds (DAFs) or other intermediaries will not qualify.

For taxpayers who itemize, the AGI cap on annual contributions will be temporarily changed from 60% to 100% of AGI for 2020 and any excess contributions will have a five-year carryover period. For corporations, the annual contribution limit is changed from 10% to 25%. In addition, the corporate food donation cap has been raised from 15% to 25%.

Can nonprofit organizations utilize the updated net operating loss (NOL) rules in the CARES Act?
Yes. Organizations who file Form 990-T may benefit from updates to the NOL rules, which reverse the NOL rule changes implemented by the recent Tax Cuts and Jobs Act. Specifically, the CARES Act provision temporarily allows losses incurred during 2018, 2019 and 2020 to be carried back up to five years (versus only carried forward). In addition, losses carried over to 2019 and 2020 can offset 100% of taxable income versus 80% under the current rules.

Understanding the Options Available to your Nonprofit
Guidance is continually being updated regarding relief provisions in the wake of COVID-19. It’s important to stay up to date and understand what options are available to your nonprofit as you navigate this time of uncertainty.

Have a question about how these provisions will impact your nonprofit? >

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